The modern competitive market is fluid and unstable medium, in which numerous companies are vying for supremacy. Every year plenty of businesses rise and fall, with newcomers to the market replacing the previous competition. One of the main reasons for failure is the poor understanding of the competition. Knowledge and understanding of how competition works and how it shapes the market are paramount to financial strategists and analysts, yet at the same time, this is the field where many crucial mistakes are made. These errors are universal and are committed by small businesses and large companies alike. Michael E. Porter, in his article named “The five competitive forces that shape strategy,” outlines the main factors that influence and shape the industry competition. Although the original article was written in 1979, it remains relevant and receives additions and edits by the author’s colleagues. It is considered an academic benchmark for generations of business scholars and practitioners.
Central Theme
The author’s entire paper revolves around the concept of five forces that shape the business environment. These forces are:
Threats of new entrants
This variable addresses the potential of the emergence of new competitors to claim their market share. These competitors, more often than not, will use penetrative marketing strategies and drop down prices, to attract potential customers to themselves. Alternatively, they might present a new product to the market, the kind it had never seen before. This is related to the other force on the list.
Bargaining power of suppliers
This factor comes into play when the suppliers become more powerful and concentrated than the companies for whom they supply goods, services, and materials. Typically, if a supplier has a monopoly or near-monopoly on a key resource required for other businesses to create their products, they have the leverage to manipulate and control the market. Microsoft is a good example of a supplier that has power over the personal computer industry – 95% of computers are forced to operate using Windows.
Threat of substitute products and services
The inability to foresee innovations coming cost many businesses their profits and client base. Typewriter manufacturers failed to see the rise of computers, Nokia failed to ride the wave of smartphones, Kodak and Fuji were not prepared for the emergence of digital photography. Competition can appear in many shapes and forms, and sometimes substitute products have the power to completely replace the original.
Bargaining power of buyers
The buyers are the end-users of the products that a company makes. They are the source of profits, and as such can shape the market in different ways. There are different kinds of buyers, which are influenced by different motives. Big buyers, such as corporations, governments, or companies, have the power to influence the market on their own by procuring large shipments of goods from certain companies. Regular buyers have the power of influencing the market too, as their wealth and trends affect the fluctuations of the market.
Competition between the existing members of the market
Naturally, competition between members of the market to earn their market share harms profits, as companies are forced to offer better services and better goods for the same prices, to keep up with one another. The competition is influenced by the four factors mentioned above, as each of them has the power to sway the fortune from one enterprise and towards another.
The author also mentions the government as one of the forces that influence the market but do not assign it to a separate category. Instead, he states that the government is usually a catalyst or an inhibitor to one of the following factors mentioned above. By creating new laws, introducing new taxes, or supporting local producers, the governments have the power to either create or remove obstacles for certain companies. On its own, however, the government cannot be presented as a separate factor that influences the industry. The author urges to view it as a neutral entity that is neither an entrepreneur’s enemy nor a friend.
After acquainting us with these concepts, the author proposes forth a list of typical steps in industry analysis. While this list is very general, it contains a set of questions that every analyst must answer with a degree of precision to make a competent strategic analysis of the market. Porter’s article can be treated as a general guide to the realities of the market and serves as a foundation for all associated frameworks used in business planning.
Evaluation and Analysis
The fact that Porter’s article is still referenced, used, and studied by the business community testifies that the foundations he laid in his framework managed to successfully withstand the test of time. The lessons he offers in his work are well-supported by both theory and practice, as every statement in the text is followed by an example of a business enterprise, whose success or failure illustrates the validity of a particular point.
The questions the author poses at the end of his article are reminiscent of numerous modern theories and strategies taught in business and economics, such as the 4P, 5C, STP, and other systems. What these strategies have in common is the factors they require the analysts to assess:
- The products that define the industry
- Buyers and buyer groups
- Competition
- Substitutes
- Level of profitability
- Geographic location
There is very little to say about the weaknesses of this article. Its premise states that many modern managers and analysts do not bother taking into account the lessons taught by Michael Porter, which contributes to their failure. However, that statement seems false – the five factors mentioned in this article are widely used in modern business and economic theory, to the point they become common sense. It is unlikely that large companies such as Kodak, Fuji, Nokia, and others did not have professional analysts. Bad decisions tend to have good motivations behind them. This topic was not touched in this article.
What Now?
“The five competitive forces that shape strategy” has a strong educational value and can be used to introduce a novice analyst into the realities of financial strategy. The list of questions given by the author at the end of his article can be used as a framework for economic studies and actual business predictions, strategies, and prognoses. The knowledge given to us in this article is universal and can be applied to any business, no matter its size or scale. These principles work in both micro and macroeconomics. Taking all five competitive forces into account can give new insights into the realities of modern business, which is important for any analyst and entrepreneur to possess.